One of oldest Financial Services company in India which runs a Stock Broking house that caters to more than 10,00,000 customers across the country including retail and Institutional, has more than 30,000 employees, spanning across 400 cities suddenly occupies the media spotlight for financial scandal – How does that sounds? Not pleasant, right?
It simply points out the non-ethical nature of financial industry and problems of regulation in Financial System. Well that’s the case with Karvy Stock Broking; the firm recently got busted for a regulatory scandal which led to heavy losses for customers and Investors.
What’s the Karvy Stock Broking Crisis? – Explained in a Nutshell
In the line of stock broker defaults such as Fair wealth, BRH Wealth creators and Kassa Finvest etc. Karvy Stock broking is likely to occupy a spot.
The company sold off Crores worth of shares from their clients’ depository accounts and transferred the proceeded funds into its real estate business for overcoming a short-term liquidity crunch. In simple sense, the Stock broking firm sold the shares directly from its customers Demat accounts to fund its real estate business.
On November 22nd, SEBI banned Karvy Stock Broking Ltd from running its operations for misusing the money and pledging the securities belonging to its clients. As per some reports, the misused fund could be around 1,096 Crores! But some relevant sources show that the numbers will easily add up to 2000 Crores! The facts are not clear and investigation is still under the process.
To say in a broader perspective, Karvy has done a Big Financial scandal in the stock broking industry by breaking the regulatory norms and guidelines put forward by SEBI.
Even if you’re trading with other brokers, this should ring an alarm bell if you’re a regular trader or Investor. Why? Because SEBI thinks that other broking houses could’ve done similar manipulation and misuse of customer funds! On the other hand, it imply that Karvy is not the only one involved in such a kind of Malpractice, there could be other broking houses doing similar things.
What Investors and Traders can learn from this?
As they say, “Prevention is better than cure” so the Karvy’s Stock Broking crisis should remind us about the flaws in Stock Broking Industry and take preventive measures from our end.
Here are 3 different measures we can implement to make sure our funds are protected:
1. Diversify: Have multiple trading account with 2 – 3 Brokers. Make sure to diversify your holdings and cash balances in different trading accounts. If anyone of the broker defaults, the risk will be limited and you can carry on your transactions with the other ones.
2. Keep track of your Holdings in NSDL or CDSL: If you’re an Investor or Trader who hold positions for more than a day, then it’s a good idea to keep track of your holdings directly in NSDL and CDSL, apart from tracking them Broker’s trading platform. All you have to do is register on NSDL or CDSL portal and get the login credentials. After that, you can easily track your holdings either on the website or through the mobile apps.
3. Check the Power of Attorney / POA: It’s common to sign a bunch of documents before opening a trading account. Most often due to negligence or lack of time, most of the traders and investors don’t read the important documents before signing them. POA is one of the important documents you need to check before signing.
There are two types of POA:
General POA -It gives complete control for the Broker to trade, transact and sell your holdings on your behalf.
Limited Purpose POA -It gives authorization to the broker to do limited transactions such as transferring the shares on stock exchange, coping with account rules etc.
So it’s better to read the POA before signing it. Incase if you already have a trading account, you can cross-verify what type of POA you have given to the broker.
In conclusion, Stock brokers are just like any other financial intermediaries. They’re the part of Financial System which is often misguided and misrepresented. Instead of blaming the system, it’s better protect yourself by following Precautionary measures.
